Depreciation concept depreciation and the discharge

Depreciation ConceptDepreciationand the discharge of the obligation are independent accounting processes.Asset and Liability Accounted for DifferentlyLO 2ACCOUNTING BY THE LESSEE

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21-20Illustration: Caterpillar Financial Services Corp. (a subsidiary of Caterpillar) and Sterling Construction Corp. sign a lease agreement dated January 1, 2017, that calls for Caterpillar to lease a front-end loader to Sterling beginning January 1, 2017. The terms and provisions of the lease agreement, and other pertinent data, are as follows.•The term of the lease is five years. The lease agreement is noncancelable, requiring equal rental payments of $25,981.62 at the beginning of each year (annuity-due basis).•The loader has a fair value at the inception of the lease of $100,000, an estimated economic life of five years, and no residual value.•Sterling pays all of the executory costs directly to third parties except for the property taxes of $2,000 per year, which is included as part of its annual payments to Caterpillar.•The lease contains no renewal options. The loader reverts to Caterpillar at the termination of the lease.•Sterling’s incremental borrowing rate is 11 percent per year.•Sterling depreciates, on a straight-line basis, similar equipment that it owns.•Caterpillar sets the annual rental to earn a rate of return on its investment of 10 percent per year; Sterling knows this fact.LO 2ACCOUNTING BY THE LESSEE

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21-26Depreciation Expense (capital leases) 20,000Accumulated Depreciation—Capital Leases 20,000LO 2Prepare the required on December 31, 2017, to record depreciation for the year using the straight-line method ($100,000 ÷ 5 years).

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